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Updated January 12th, 2024 at 16:25 IST

US startup funding slashes by 30% in 2023, AI remains in focus

Investments in AI research facilities, particularly those focusing on training expansive language models, were substantial.

Funding
Representative | Image:Unsplash
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Startup funding in USA: Investment from US backers into startups totalled $170.6 billion in 2013, marking a decline of approximately 30 per cent compared to the $242.2 billion registered in the previous year, as per data disclosed by PitchBook on Thursday. The venture capital landscape faced challenges with revaluations amidst escalating interest rates.

This data reveals a consistent downturn from the pinnacle of US venture capital activity observed in 2021 when startups amassed $348 billion. Notably, the allure of artificial intelligence (AI) megadeals remained strong, capturing most of the investor attention, partly ignited by the surge of OpenAI's ChatGPT. In 2023, AI startups secured one-third of all US investments, as companies hurriedly innovated within this domain.

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Investments in AI research facilities, particularly those focusing on training expansive language models, were substantial. Such high-cost ventures notably boosted the financial landscape, with prominent investments in AI frontrunners like OpenAI and Anthropic, constituting 10 per cent of the overall deal value last year.

The concluding quarter of 2023 witnessed a minor resurgence in deal activities, culminating in 3,934 completed transactions, hinting at potential stabilisation within the market.

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Interestingly, the proportion of startups securing funds at reduced valuations compared to their preceding rounds surged from 8 per cent in 2022 to 20 per cent in 2023. This trend signals a widespread recalibration of valuations, particularly among mature-stage enterprises.

Ken Smythe, the founder of Next Round Capital, remarked on the differential trading scenarios within the sector. He observed that AI and specific software entities command premium valuations, while sectors like food and consumer delivery witness substantial devaluations.

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Further complicating the scenario is the situation faced by the 723 unicorn startups—companies valued above $1 billion—which are anticipated to seek additional funding this year as their reserves diminish. Despite venture capital entities holding over $270 billion in unallocated capital as of mid-2023, the pace of their fundraising activities has decelerated significantly.

PitchBook's insights indicate that US-based venture capital entities garnered $67 billion in 2023, a stark 60 per cent decline year-on-year and the lowest in six years. This dwindling trend could intensify financial strains on startups seeking capital.

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David York, managing director at Top Tier Capital, expressed concerns about the imminent need for venture capital fund managers to secure recapitalisation within the next 12-24 months. He highlighted that while institutions continue to invest in their top-performing managers, the overall funding pool has contracted, leaving fewer resources available.

(With Reuters inputs)

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Published January 12th, 2024 at 16:25 IST

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